Subsidiary’s agreement to arbitrate brings in parent

Egiazaryan and another v OJSC OEK Finance and the City of Moscow [2015] EWHC 3532 (Comm)

We discuss an English judgment which provides an interesting analysis of the circumstances in which non-parties to an arbitration agreement can be joined in arbitration. In the Egiazaryan case, the court found that an arbitral tribunal had jurisdiction over a Russian public authority, even though it was not a party to the arbitration agreement. This case will be of interest to anyone advising on Russian-related disputes, which frequently involve allegations of tortious misconduct by nonparties to the agreements – often parent companies.

In the Egiazaryan case, the English court considered a challenge to an award on jurisdiction under section 67 of the Arbitration Act 1996 (1996 Act) on grounds, among others, that the London-seated tribunal was wrong to conclude that it lacked jurisdiction over a Russian public authority (the City of Moscow) which was not a signatory to the arbitration agreement. The English court held that, notwithstanding that it was not a party to the agreement, the tribunal had jurisdiction over the City of Moscow because its subsidiary’s agreement to arbitrate was sufficient under Russian law to join it in the arbitration. This judgment provides an interesting analysis of the rules applicable to the question of whether and how non-parties to an arbitration agreement – including municipal bodies – can be joined in arbitration.

English law recognises limited circumstances where a non-party may be bound to arbitrate

Under English law, the general principle is that due to the consensual nature of arbitration only the parties to an arbitration agreement are bound by that agreement, and any award is effective only against those parties and persons claiming through or under them. However, English law recognises limited circumstances where a third-party may be bound by an arbitration agreement to which it was not a party. These include:

• assignment
• subrogation
• merger
• agency
• statutory provisions – for example, the Third Parties (Rights Against Insurers) Act 1930 and the Contracts (Rights of Third Parties) Act 1999 (CRTPA 1999) which enable third parties, in certain circumstances, to enforce contractual terms; these third parties may be bound by arbitration agreements in the relevant contract
• circumstances where a non-party otherwise seeks to exercise a right under a contract containing an arbitration clause — in which case it will be bound by the arbitration clause despite not being a party to the contract (The Padres Island [1984] 2 Lloyds Rep 408).

English law recognises limited exceptions where a non-party can be joined in an arbitration

Another general principle of English law is that only the parties to an arbitration agreement may participate in an arbitration. Again, English law recognises limited exceptions where a nonparty can be joined in an arbitration. These include:

• under CRTPA 1999 (as above) – however, without clear wording, unless the non-party is seeking to enforce a contractual term in the agreement to which it is not a party, CRTPA 1999 does not impose an obligation on the thirdparty, or indeed a right, to arbitrate (Fortress Value Recovery Fund I LLC and others v Blue Skye Special Opportunities Fund LP and others [2013] EWCA Civ 367)
• under section 82(2) 1996 Act – non-parties claiming under or through a party to an arbitration agreement are treated as a party to the agreement
• by piercing the corporate veil – the circumstances in which this can be done are not clear as the law is not yet settled.

The facts of the Egiazaryan case

The dispute arose from allegations that the respondents had tortiously orchestrated a corporate raid to oust the claimants from a hotel redevelopment project in Moscow. The relevant contracts were a shareholders’ agreement and a share purchase agreement (the Agreements). These were governed by English law and contained an arbitration clause stating that “any dispute, controversy or claim arising out of, relating to or in connection with [the Agreements], including any question regarding its existence, validity or termination, or regarding a breach” shall be referred to arbitration in London.

The second respondent (a Russian public authority) was not a party to the Agreements though its subsidiary was. The claimants argued that, although a non-signatory, the second respondent could be joined in the arbitration by virtue of article 105 of the Russian Civil Code (Article 105). The tribunal concluded, having heard Russian law expert evidence, that Article 105 “makes a parent jointly and severally liable on the relevant contract as a whole… this includes liability to perform the Arbitration Agreement.”

The tribunal refused jurisdiction, however, on the ground that, as English law was the proper law of the Agreements, Article 105 had no effect. The tribunal also declined jurisdiction over the tort claim, finding that it was not covered by the arbitration clause. The second claimant challenged these parts of the tribunal’s award before the English High Court.

The English High Court judgment

The court was asked to consider (amongst other things) whether the tort claim fell within the arbitration clauses and whether Russian law had any effect on whether a nonsignatory to an English law arbitration agreement could be joined in the arbitration. There was no challenge to the tribunal’s findings on the operation of Article 105.

Burton J held that the tort claim did fall within the arbitration clause – section 6(1) 1996 Act is clear that an arbitration agreement is “an agreement to submit to arbitration present or future disputes (whether they are contractual or not)”.

Burton J also held that the second respondent had been properly joined. The question was whether there was jurisdiction over the non-signatory – not who were the parties to the arbitration agreement. Under English conflict of laws principles, the law applicable to the question of whether a parent is liable to perform an agreement entered into by its subsidiary is the law of the place of incorporation of the subsidiary. Given that the subsidiary was incorporated in Russia, Russian law applied and, applying Article 105, the non-signatory parent could be joined.

Burton J’s judgment highlights the important distinction between identifying the parties to an arbitration agreement and determining who can be made a party to English-seated arbitral proceedings. The former is a question governed by the substantive law of the agreement. The latter is a more complicated question: which law applies will be determined by applying English choice of law principles to the circumstances, and therefore depends on the grounds on which it is asserted the non-party should be joined.

The Russian perspective on the Egiazaryan case

Russian shareholders’ agreements are commonly governed by English law and provide for London-seated arbitration, and such disputes often involve allegations of tortious misconduct by non-parties to the agreements – frequently parent companies. This case will therefore be of particular interest to anyone drafting Russian shareholders’ agreements or advising on Russian shareholder disputes.

The decision in the Egiazaryan case has been received with some surprise by the Russian legal community for a number of reasons. In particular, some Russian lawyers have suggested that the Russian courts would have taken a different approach to the question of arbitral jurisdiction over state entity parent companies.

In the only reported Russian court decision on the question of whether, by virtue of its subsidiary being a party to an arbitration agreement, a tribunal had jurisdiction over a nonsignatory state entity parent, the Russian Supreme Arbitrazh Court held that the tribunal had no jurisdiction (Government of Moscow v S+T Handelsgellschaft case no. А40-41781/13). However, that case turned on the doctrine of piercing the corporate veil, which the Russian court held could not be used in that context.

We can only speculate why the parties in that case did not seek to rely on Article 105. However, some Russian lawyers have suggested that, under Russian law, Article 105 does not in fact apply in the manner accepted by the tribunal in the Egiazaryan case. The reasons given are various. The first is that Article 105 applies in the context of relationships between a parent company and subsidiary, whereas the second respondent is a public law entity and would not be considered a parent company in Russia. The second is that the scope of Article 105 is narrow, applying only where there is a specific legal or contractual obligation on the subsidiary to follow the directions of the parent company. The third is that Article 105 is a statutory basis for joint liability not for deeming the parent to be a party to the contract in question or to assume obligations thereunder. The fourth is that the wording of Article 105 indicates that it would only apply in the context of contractual liability, not non-contractual claims.

However, as the tribunal’s findings on the Russian law evidence regarding the operation of Article 105 were not challenged in the appeal, the English court was not asked to give its view on these issues.

Comment

The Egiazaryan case demonstrates the tricky conflict of laws issues that can arise in international arbitration. It is also an excellent example of why it is often inappropriate to use a standard form template arbitration clause in an contract – if parties wish to avoid expensive satellite disputes, arbitration agreements must be carefully drafted to suit the circumstances and parties involved. The lesson from the Egiazaryan case is that, when drafting, parties must ensure that they consider all relevant laws, including the laws of the place of incorporation of signatories as those may impact the parties’ rights and obligations. Parties must also consider the position of thirdparty non-signatories, and whether an express consent (or indeed, refusal) to arbitrate is warranted, to avoid subsequent arguments over the tribunal’s jurisdiction.